Five reasons why China's economy is in trouble

September 15, 2023

The Hang Seng Index in Hong Kong has experienced a significant drop of over 20% since its recent peak. Concurrently, the Chinese yuan has reached its lowest point in the last 16 years. In response to this situation, the central bank set a substantially higher exchange rate. Does it mean that the Chinese economy is collapsing? Let’s see. 

China economy: is it nearing a crisis

China's economy faces many challenges that have led to concerns about its economic outlook. Here are five of the most pressing issues.

Slowdown of the property market

Due to such factors as rising interest rates, stricter lending standards, and concerns about oversupply, the property market is having a knock-on effect on other sectors of the economy. 

Debt crisis

China's debt levels are among the highest in the world. The government, businesses, and households are all heavily indebted. And the situation only got worse due to the growth slowdown.

Aging population

The working-age population is shrinking, while the number of retirees is growing. Efforts to encourage higher birth rates and raise the retirement age face challenges due to political sensitivities.

Trade tensions with the US

The ongoing trade conflict between China and the United States is harming both economies. The tariffs imposed by both sides have raised prices for consumers and businesses. These tensions are also causing uncertainty about the future of the global economy, which is weighing on investor sentiment.

Slow innovation pace

China's economic growth has been driven by innovation in recent decades, but the pace of innovation is slowing down. The government is trying to address this issue by increasing spending on research and development and involving foreign investment.

China’s Global Inflation influence

China's influence on global inflation is complex and multifaceted. On the one hand, as a major exporter of goods and services, rising prices within China could translate to higher prices worldwide. On the other hand, China's own inflation rate has been relatively low in recent years. 

Here are some specific ways that China affects global inflation:

  • Rising wages. China's wages have been rising in recent years, which could lead to higher production costs for businesses. It could lead to higher prices and undermine consumer confidence.
  • Currency depreciation. If the Chinese yuan depreciates against the US dollar, it could make Chinese exports cheaper, causing higher inflation in other countries.

In summary, China's economy is confronting significant inflationary pressures and many challenges. It remains premature to predict whether China will deal with these challenges, but the government is steadfast in its commitment to doing so. If you wish to stay updated on developments regarding China's economy, please feel free to visit the Market News section on YouHold.